Barclays faces tax bill after loophole closed

AinsleyThomson

LONDON (MarketWatch) -- U.K. bank Barclays PLC
BCS, -2.62%
will have to fork out an additional GBP500 million in taxes after the government closed down two "aggressive" schemes it used to avoid taxes, a person familiar with the matter said Tuesday.

The Treasury on Monday night described the two schemes as "highly abusive" and said closing the loopholes would also prevent billions of pounds in revenues being lost in the future. It said the schemes were designed to work around existing legislation that had been introduced to block similar attempts at tax avoidance. The Treasury didn't identify the bank in its statement, citing confidentiality reasons.

David Gauke, exchequer secretary to the Treasury, also declined to confirm it was Barclays during a BBC interview Tuesday morning, but said the bank in question was "clearly taking a substantial reputational hit."

Barclays is one of 15 top banks operating in the U.K. that has adopted the Code of Practice on Taxation, which contains a commitment not engage in tax avoidance.

Barclays declined to comment early Tuesday after several news outlets identified it as the bank targeted by the U.K. government.

The news also comes amid a continued backlash from the public against corporate greed and excessive bonuses in the banking industry, especially among top bankers.

The tax avoidance came to light when the bank recently disclosed to U.K. tax department, HM Revenue & Customs, that it had used the schemes.

The first scheme allowed Barclays to avoid corporation tax on commercial profit from a buyback of the bank's own debt.

In an unusual step, the government said it would introduce legislation not only to prevent the scheme's use in the future, but also to act retrospectively to block its recent use by the bank. The legislation would apply to any other bank or company that has used a similar scheme recently.

"We do not take today's action lightly, but the potential tax loss from this scheme and the history of previous abuse in this area mean that this is a circumstance where the decision to change the law with full retrospective effect is justified," Gauke said. "The government wants to ensure that the tax system is fair for all and we will not allow those who seek to benefit from this aggressive avoidance to get an unfair advantage."

The government's action coincides with a surge in recent months of banks buying back debt from their subordinated bondholders. Banks that have launched debt exchanges include Barclays, Lloyds Banking Group PLC
LYG, -1.75%
Banco Santander SA
STD, +0.18%
and Bank of America Corp.'s Bank of America Merrill Lynch (BAC). The debt buybacks were spurred by the relatively inexpensive price of the debt after costs dropped during the financial crisis, and by the boost it provides to the banks' capital levels, something increasingly required by regulators.

The Treasury said the second tax avoidance scheme involved using investment funds to convert non-taxable income into income entitled to a tax credit, which meant the bank was able get a "repayment" or credit from the Treasury on tax that hadn't been paid. The government will Monday introduce legislation to block any future use of the scheme.

Barclays is one of the 15 largest banks operating in the U.K. that have adopted the Code of Practice on Taxation, which stipulates that banks should have strong governance around tax, and should follow the "spirit" of the law in addition to the letter of the law.

"The government is clear that these [the two tax avoidance schemes] are not transactions that a bank that has adopted the code should be undertaking," the Treasury said.

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